Surprise industrial slump adds to India's economic woes

An employee inspects the spinning wheel to roll power wires at the Kei Industries, one of India's leading electrical equipment manufacturers at the industrial estate of Bhiwadi, in Rajasthan August 6, 2012.B Mathur

NEW DELHI (Reuters) - India's industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and pull Asia's third-largest economy from its worst slowdown in almost a decade.

The manufacturing-led slump provided further ammunition to the slew of private economists who downgraded their growth outlook for India this week, citing the impact of a worsening drought on farming and political hurdles to economic reform.

Chidambaram called the numbers "disappointing," and said there was a need to remove supply bottlenecks and raise production across the economy.

"We intend to find practical solutions to the problems that impede higher production or output in the coal, mining, petroleum, power, road transport, railway and port sectors," Chidambaram said in a statement responding to the data.

Industrial output shrank 1.8 percent, dragged down by a deep dip in manufacturing, the data released on Thursday showed. The number was lower than a forecast of 1 percent growth in a Reuters poll and sharply lower than 9.5 percent growth a year earlier.

"Data will pile pressure on the new finance minister to jump start the reform process and revive investment interest, which is likely to be a key drag on overall growth heading into H2," said Radhika Rao, an economist at Forecast PTE in Singapore.

Capital goods, a key investment indicator that has shown growth only once in the past 10 months, slumped 27.9 percent in June, the data showed.

The Sensex edged lower on Thursday after the industrial output data. The index ended down 0.23 percent.

India's interest rates are among the highest in major economies and the contraction renewed c alls for the Reserve Bank of India (RBI) to lower them at a September 17 policy meeting, setting up a potential clash as the central bank has been clear a rate cut will only happen if inflation eases.

"There is a strong case for the RBI to cut interest rates further at least by 50 basis points immediately so as to encourage investments," said R.V. Kanoria, president of the Federation of Indian Chambers of Commerce and Industry.

GDP growth faltered to a nine-year low of 5.3 percent in the quarter ended in March, with corporate investors deterred by the high interest rates and a policy gridlock. GDP data for the quarter ended June is due to be released on August 31.

A general view of the industrial estate of Bhiwadi is pictured in Rajasthan August 6, 2012.B Mathur

DROUGHT WORRIES

Several economists this week cut their full-year growth forecast for India to around 5.5 percent -- which would be the slowest rate in 10 years.

On Monday, Chidambaram promised a stable and fair tax regime to regain investors' confidence, but sceptics said it would not be easy to put the economy back on a high growth path and stabilize government finances.

Economic reforms are stalled on fears of a political backlash to steps such as allowing foreign supermarkets into India, while a drought in some parts of the country makes it harder to cut fuel subsidies blamed for a widening fiscal deficit.

A labourer works inside a steel factory on the outskirts of Jammu June 12, 2012.Mukesh Gupta/Files

Manufacturing, which constitutes about 76 percent of industrial production, shrank an annual 3.2 percent from a year earlier. The sector has been knocked by shrinking exports to recession-hit Europe and slowing U.S. economy.

Auto, industrial machinery, electrical and electronic equipment and sugar production led the slowdown in manufacturing, according to the data.

India's exports fell 5.45 percent to $25.1 billion in June, after recording strong growth for much of the last year.

On Tuesday the government said it was considering lifting import taxes on sugar, a step that could reduce inflationary pressures that keep lending rates by commercial banks at more than 10 percent for a majority customers. But analysts said rising food prices would limit space for monetary easing.

The RBI remains a hawkish outlier among central banks -- China, Brazil and South Korea have eased monetary policy in recent weeks to bolster flagging economies.

India's industrial output data is volatile but is considered a barometer of GDP growth. May's figure was revised to 2.5 percent from 2.4 percent, the data showed.

The HSBC manufacturing Purchasing Managers' Index (PMI), which gauges business activity at India's factories but not utilities, fell to 52.9 in July, from 55.0 in June - its biggest one-month drop since September last year..